James Pethokoukis

Politics and policy from inside Washington

Will GOP midterm win help reelect Obama in 2012? Maybe not

Oct 21, 2010 18:07 UTC

The Washington consensus is that if the GOP takes at least the House, it will give Obama a political foil and give his 2012 election hopes a big boost. And, the media tell us, the GOP presidential field is weak:

Sniping from the sidelines will be potential Republican challengers to Obama in 2012. The road to the presidential proving grounds of Iowa and New Hampshire is already well-trod by more than a dozen possible Republican candidates. The group ranges from Tea Party champion Sarah Palin to former Massachusetts Governor Mitt Romney and Minnesota Governor Tim Pawlenty. Experts believe Obama would match up well against any in this group — if the economy is on the mend and the jobless rate is trending downward from its current 9.6 percent.

But political analyst John Ellis paints a different potential scenario:

What might be an alternative story line? One answer would be: increased volatility. A darker answer might be: political instability and unrest.

As a nation, we are struggling with overwhelming debt at every level of governance and across a vast swath of the electorate. There are at least (at the very least) 15 states and countless municipalities that are functionally bankrupt. The states that are bankrupt, by any real accounting, include New York, New Jersey, Massachusetts, Connecticut, Illinois, California, Nevada, Arizona, Colorado, Ohio, Wisconsin, Louisiana, Missouri, Oregon, Washington and Michigan. They can’t (literally can not) meet their pension obligations. They won’t be able to pay for their ever-rising health care costs. Education costs are eating up too much money (although this will abate somewhat as the echo boom generation matriculates) and virtually every state (and municipality) has huge bond obligations, the proceeds from which papered over previous shortfalls. Oh, and one other thing, the economies in all of those states are stagnant, at best.

Once the last infusions of stimulus money run dry, what remains is a vast desert of debt. The idea that an over-leveraged electorate can be called upon to make up the shortfall is a non-starter. They can’t pay down their own debt and municipal debt and state debt and federal debt. The math simply doesn’t work. They end up with no take home pay.

This is the real avalanche that is about to hit American democracy. The avalanche in two weeks results in Nancy Pelosi no longer being the Speaker of the House. The avalanche of debt that hits beginning in 2011 and keeps on coming will shake our political system to its foundation. That’s the avalanche that matters.

President Obama can either get ahead of this avalanche by proposing a vast restructuring of government debt and obligations while aggressively promoting a venture-based economic growth agenda or he can be consumed by the rubble. The same holds true for the next Republican presidential nominee. He or she needs to be ahead of the avalanche to survive its inevitable onslaught.

Me: Austerity won’t sell. Growth and prosperity will. Whoever gaffs that, wins.

COMMENT

The reason that state budgets are completely decimated? Because the lion’s share of their booty was from property taxes! The states that are listed above are the one’s where the housing market was hit hardest, upwards of 40-50% declines. Show me ANY place (govt or business) in the world where a 40-50% drop in the biggest source of revenue doesn’t lead to big trouble. But, of course, it’s Obama’s fault. You… just… don’t… get it! AT THE STATE LEVEL no less! Sigh…

If people are disenfranchised with the current president it’s not because the MSM has given him a free pass, it’s because they don’t know their asses from a hole in the ground and continually misinform the public (both sides of the MSM.) They completely obfuscate the real issues and turn it into something completely different. Then the public gets mad because they think that the President is either lying or oblivious because the media presents everything incorrectly. Political spin is what’s helping destroy America because the public is never properly informed – one has to look outside the America media sphere to find informed journalism that weighs facts.

And let’s also be frank in saying that the old normal of the last 25 years has been fueled almost exclusively by debt. Complaining that growth that is not supercharged by increasing the debt load is poor or bad and Obama’s fault is so ridiculous as to be laughable and should be ignored outright. I find it so deplorable that people can be so duplicitous as to say that we can achieve growth in the short term by cutting debt – NO! that is NOT true as the 70s proved. We’re in for a long ugly period of adjusting our balance sheets, govt, business and consumers.

I’m sure you’d blame the 70s on Carter, but Nixon/Ford set up the conditions that were met by Carter. And while Carter had his share of missteps, none were quite as badly received as the economy being in a low growth, high inflation environment. So he inherited a shite economy and didn’t improve it fast enough because he wasn’t willing to open the pandora’s box of rampant debt accumumlation and deregulation. Now, if you want to stand for cutting debt/deficits – sure, I’ll be on board, but you can’t expect that growth will suddenly double by spending less. It’s really simple math.

Posted by CDN_finance | Report as abusive

Fannie and Freddie and Barney

Oct 21, 2010 17:02 UTC

IBD‘s great Capital Hill blog makes a good point about F&F and the midterms:

That’s more bad news for Rep. Barney Frank, D-Mass., who’s in the political fight of his life with Republican Sean Bielat. The businessman and Marine reservist has laid into Frank, now chairman of the House Financial Services Committee, for his long support of Fannie and Fannie.

The government-sponsored enterprises were a major cause of the financial crisis. With their implicit — now explicit — taxpayer guarantees, Fannie and Freddie were able to expand and leverage far more than any truly private company could, and they used that heft to plow into subprime loans.

Back at a 2003 hearing, Frank pooh-poohed Republican and regulator concerns about the size and scope of Freddie and Fannie, saying he didn’t want to emphasize “safety and soundness.” Instead, he said, “I want to roll the dice a little bit more in this situation towards subsidized housing.”

COMMENT

Acetracy,

How is it Dems can whine about Republicans blocking Obama’s agneda when they, the GOP are a minority, yet they cannot fathom how the Dems could block any reform to Fran and Fred?

did you ever hear of a super-majority?

Posted by contessa61 | Report as abusive

Fannie and Freddie could need $363 billion in taxpayer funds by 2013

Oct 21, 2010 14:32 UTC

Ugh.

The Federal Housing Finance Agency (FHFA) today released projections of the financial performance of Fannie Mae and Freddie Mac (the Enterprises) including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the U.S. Department of the Treasury. To date, the Enterprises have drawn $148 billion from the Treasury Department under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013.

The FFHA ginned up three different underlying economic forecasts:

ffha1

And then ran the numbers:

ffha2

Is Geithner the next to leave Obamaland?

Oct 21, 2010 13:39 UTC

The man behind the Volcker Rule and the bank tax will soon be leaving Washington. That’s right, Obama political adviser David Axelrod is headed back to Chicago. What, you thought I meant Treasury Secretary Timothy Geithner? As for Geithner, he will more than likely be at Treasury for the duration, though in some ways he has a better skillset for the National Economic Council. Here’s a bit from my recent Reuters Breakingviews columnette on Obama’s pal:

Treasury secretaries are typically former CEOs, prominent politicos or longtime presidential pals. A career technocrat, Geithner didn’t tick any of those boxes. Instead, he was part of the crisis-response troika, along with Ben Bernanke and Hank Paulson. Effectively, Geithner was hired to be a fixer.

Nearly two years in, it’s Mission More or Less Accomplished. The St. Louis Fed’s “financial stress index” — incorporating various interest rates, yield spreads and bond indices — is currently 0.48 after hitting a peak of 5.09 in October 2008. Even the pilloried bank bailout gets better with age. (It was certainly better than outright bank nationalization). Geithner deserves considerable credit for it, especially his push for “stress tests” to be included.

But a new set of skills may be required for the next two years. Obama soon will need help from his Treasury secretary advancing a new budget agenda after his ballyhooed deficit commission issues its report in December. The job also will require pushing Beijing to trade more freely while tamping down on protectionist sentiment at home, redoubling efforts on unemployment and finely honing a tax policy.

Geithner might not be the obvious candidate for most of this modified job description. Before he got to the Fed in 2003, his education and career had been more focused on international affairs than domestic issues. And Geithner could still present political liabilities given earlier personal tax missteps and his dicey relations with Congress.

But if not Geithner, who? Wall Street bosses are still radioactive, while recruiting Clinton administration veterans could look desperate. The scarcity of obvious replacements is highlighted by the permanent presence of media mogul and New York Mayor Michael Bloomberg’s name on the Beltway circuit, despite his repeated denials of interest in the job.

Most importantly, Geithner seems still to have the full confidence of his boss. That’s probably more than enough for him to keep his spot on the team.

Me: I think Geithner has it about right on China trade, and he certainly takes the budget deficit seriously. He is even sounding better on “King Dollar, as my friend Larry Kudlow puts it. It’s really no joke that he could have comfortably been a member of John McCain’s cabinet.  On tax policy, he and the rest of Team Obama have it totally wrong.  Raising the U.S. tax burden in the current system is anti-growth and thus terrible for the nation’s long-run solvency.

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